It mostly covers my work as UNISON Scotland's Head of Policy and Public Affairs although views are my own. For full coverage of UNISON Scotland's policy and campaigns please visit our web site. You can also follow me on Twitter. I hope you find this blog interesting and I would welcome your comments.

Tuesday, 30 April 2013

Currency union and buses

Studies on the fiscal implications of constitutional change
are a bit like buses, nothing for ages and then a series of contributions all at once.

It would be remiss of me not to modestly point out that the
Red Paper Collective published one of the earliest contributions to this
debate. My chapter in ‘People Power’ last September covered this ground and
highlighted the limitations on monetary and fiscal policy of the SNP’s
‘Sterling zone’ plan. This plan has been fleshed out in the work of the Fiscal
Commission Working Group that I have previously commented on.

The Treasury have now chipped in their tuppence worth,
actually a lot more than that at 113 pages! They, not surprisingly, argue that
the UK is one of the, “most successful monetary and fiscal unions in history”. This
claim is largely based on the pooling of risk and resources, in contrast to the
Euro. No opportunity is missed these days to have a pop at the EU, to assuage
Tory back benchers!

The Treasury correctly points out that an Independent
Scotland would need to establish its own institutional framework. The notion
argued by some in the Yes campaign that Scotland owns part of the Bank of
England and the pound is frankly risible. It then sets out the currency
options, including the SNP’s preferred plan of a formal agreement on the use of
Sterling. If such a plan could be agreed, then an Independent Scotland would
need to agree, “a negotiated set of constraints on its economic and fiscal
polices”. The paper makes it clear that there is not a clear economic rationale
for rUK to agree such a plan, citing the Euro experience. That leaves Scotland
with the even less attractive option of using Sterling with no agreement and no
control over monetary policy.

SCDI have covered similar ground with their Future Scotland
‘Macroeconomic and Fiscal Sustainability’ paper. They set out in some detail
the economic context and consider the fiscal position of an Independent
Scotland. They also highlight that a rUK Government may seek to limit
flexibility over spending and borrowing and the Bank of England would set an
interest rate for the rUK, not an Independent Scotland. SCDI highlights the
concerns over these arrangements for key service industries like finance. Not
to mention the less publicised implications for credit ratings and a potential
risk premium for borrowing.

CPPR has published a briefing paper ‘Measuring an
Independent Scotland’s economic performance’. This concisely looks at growth
and standard of living and asks what does this mean for the constitutional
debate. They make the point that GDP per capita is not the same as household
income. A point reinforced this week by Brian Ashcroft in his Scottish Economy
Watch blog. Scotland’s GDP would be highly dependent on erratic oil prices a
significant proportion of which is overseas owned.

There is also a chapter on this issue in a new book ‘Scotland’s
Future’ by Professor John Kay. He clearly sets out the currency and policy options
for an independent Scotland and considers historical precedents. He agrees that
the Sterling Zone option would be the best for an Independent Scotland, but
points out that any membership of the monetary policy committee would be an
economist with Scottish connections, not a Scottish representative. He
concludes that, “Monetary policy for Scotland would therefore be determined by
a mechanism over which Scots and Scottish interests would have at best marginal
influences and, by design, no political influence”. However, his key point is
that a small country close to its major trading partner has limited economic
independence anyway.

A different perspective comes from the Reid Foundation with a paper by Jim Cuthbert that makes the equally valid point that the
UK’s economic performance reflects chronic long term mismanagement. In
particular, the underlying balance of trade and focus on the financial sector
that was not in the interests of the wider economy. It exposes the UK economy
to a credit risk and makes us sensitive to external shocks. On this basis he
argues that Scotland should not remain in a ‘sub-optimal currency union’. This
line has been picked up by many in the wider Yes campaign last weekend,
including the Greens and the SSP. Of course it also used to be Alex Salmond’s
position, as Andy Nicholl reminded us in his column in the Scottish Sun.
However, it would appear that his statement, “Sterling is like a millstone
around Scotland’s neck” no longer applies, even if his new allies wish it did!
Mind you he also once said, “The SNP believe that entry to the Euro would be in
Scotland’s economic interests”. Of course, in fairness, he was not alone in
that view at the time.

So where does all this take us? I would argue back to my
initial analysis in last September’s Red Paper booklet. A currency union with
rUK may well be the best option for Scotland, although personally I am not
convinced, but it comes at a price - fiscal and monetary policy directed by
another country. This is a strange sort of independence and one that gives us
less influence over these issues than we have at present, or could have with
greater devolution. The political conundrum for the SNP is that if they
abandoned the pound, the polls show a big drop in support for Independence. They
may therefore just have to accept John Kay’s economic reality - that Scotland
is tied to its major trading partner, Independent or not, and the best we can
do is tinker at the policy edges.

No comments:

Post a Comment

Sign up to

Subscribe To

About Me

I am the Head of Policy and Public Affairs at UNISON, Scotland’s largest trade union.
I am a Board member at the Reid Foundation and Keir Hardie Society. Secretary of the Socialist Health Association Scotland. Past Chair of the Scottish Labour Party and SEC member.
Graduate in Law from University of Strathclyde. Fellow of the RSA.
I edit Utilities Scotland and Pensions Scotland and also regularly blog at Public Works, Red Paper, SHA Scotland and Revitalise Scottish Labour.